Yandex: High Potential In Taxi Segment – Yandex N.V. (NASDAQ:YNDX)

New acquisition in the taxi segment

In this article, we will focus on the taxi-business line of Yandex. Formerly we analyzed possible outcomes of the Yandex-Uber (NYSE: UBER) business combination. In the previous article, we estimated that the combined company’s market share would be 16%. After the upcoming Vezyot M&A deal, Yandex’s share may reach 40%:

Source: Рынок такси переходит в фазу стабилизации

Yandex’s main competitors still hold a minor amount of market share. The Vezyot deal will strengthen Yandex Taxi’s leading position.

However, there’s significant risk that Russian anti-monopoly authorities will prohibit the deal. Gett, one of the Yandex’s main competitors in the Russian market, lodged an official complaint to the Federal Anti-Monopoly Service concerning the upcoming acquisition. Yandex applied to FAS in October for deal approval. FAS’ final decision is expected to be announced in the near future.

Performance of the taxi segment

In the second and third quarters of 2019 Yandex showed a positive financial result in its taxi service business for the first time in the company’s history:

Source: Yandex’s quarterly reports, mln USD

The Analytical Center for the Government of the Russian Federation predicts 5.6% growth in legal taxi services in 2019, and around 3.7%-4% in 2020.

Based on this, we project taxi-segment revenues at 32.8% of the company’s total revenue by 2023:

Source: Yandex’s quarterly reports

The estimate is based on the current dynamics of the segment’s revenue: Its share in the company’s total revenue increased from 3% in 2016 to 16.1% in 2018. In the first nine months of 2019 taxi services share amounted to 21.1% of total revenues, and we expect it to reach 22.4% for Q4 2019.

Taxi services’ main growth engine is a stable increase in travel quantity. The average purchase size is also increasing, and this further demonstrates the rise in this segment:

Source: Moscow Government (Ministry of Transport)

Moreover, we expect further growth in the average purchase amount. The downtrend during 2016-2018 was a result of imprecise consumer preferences: There was competition in retail price for new users among Yandex and its competitors. Following a slowdown in the travel numbers’ growth, we expect falling incomes in this segment.

The travel numbers are gradually declining and are showing a downtrend:

However, the average quarterly growth ratio in 2019 is expected to exceed 50%. In other words, the taxi segment will continue to attract a large number of new customers and increase the number of travels.

Valuation results

We estimate the taxi segment to potentially produce 19.7% of the company’s total EBITDA by 2023:

Source: Yandex’s quarterly reports

Yandex achieved positive EBITDA in Q2 and Q3 2019, and following this the taxi business is expected to increasingly impact the company’s value. Our DCF evaluation model shows upside potential at least at a rate of 7% of the company’s stock in the baseline scenario under these assumptions:

  • WACC of 18%.
  • 22.5x EV/EBITDA multiple.
  • Current growth ratios for EBIT.
  • EBIT margin of 16%.
  • CAPEX growth from current ~$430Mln per year to $547Mln by 2023.

Here are the results of a sensitivity analysis of Yandex’s stocks upside potential:

Source: DCF Model

Conclusion

Upon the upcoming acquisition of Vesyot, Yandex will strengthen its position in the Russian online taxi market. We predict that Yandex will receive about 20% of its total EBITDA from the taxi business area. In the baseline scenario, we anticipate that Yandex’s stock price may reach $43.50-$46 in the medium term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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